Budget 2017: Can Digital Plug The UK’s Productivity Gap?

There’s little surprise that the reactionary headlines to the Autumn Budget were centred on housing. In drafting his budget, Philip Hammond was under pressure to come up with something for the young, those feeling themselves victims of intergenerational theft. Abolishing stamp duty for first time buyers is a strong indicator of political intent, even if it may not solve the underlying problems of a lack of supply in housing.

But the bigger story coming from the autumn budget was undoubtedly the grim productivity forecasts.

The Chancellor announced that the OBR has lowered its forecast for productivity growth – down from 2% to 1.5% in 2017. This is an extraordinary challenge for the UK, with the productivity gap between Britain and the rest of the G7 group of industrial nations at its greatest since the beginning of the 1990s when the modern records commenced. It’s undoubtedly a big driver of the forecast that UK earnings could be the same in 2022 as in 2008.

A fibre backbone for productivity

While there is no quick fix to the UK’s productivity challenge, there are some steps that can be taken now which will certainly help. The Government has indicated that digital connectivity will play an important role in the Modern Industrial Strategy that aims to raise productivity and wages in every part of the country. The Chancellor also announced a number of investments that he hopes to stimulate the UK’s productivity and support the growth of digital industries, including a further £2.3bn of investment for R&D in the National Productivity Investment Fund (NPIF).

The Government is committed to delivering a future proofed digital infrastructure with the launch of a new £190 million Challenge Fund for fibre investment, for which local public sector organisations can bid.

Investments in next gen mobile connectivity have also been built upon, with a further £160 million from the NPIF dedicated to new 5G infrastructure. Projects will include a £10 million investment where the security of 5G networks will be tested and £5 million to test 5G applications and deployment on roads that will support driverless cars.

These proposals to improve the UK’s digital infrastructure are necessary first steps towards solving the UK’s existing problem with lower productivity rates. Fundamentally, productivity levels are not going to increase until everyone in the UK has access to the essential, resilient digital infrastructure that is required for them to innovate.

The skills to deliver

Another welcome commitment is the investment in digital skills, especially in the service sector.

The service sector currently accounts for the greatest share of hours worked at lower productivity levels in the UK. Therefore, digitising existing processes in this sector presents a massive opportunity to address this productivity concern.

This doesn’t mean that machines are going to take people’s jobs; the service industry fundamentally relies on human interaction. The use of technology to automate monotonous tasks should empower individuals to be more productive. However, this can only be achieved if those working in the sector have the digital skills that will allow them to adopt and deliver these new processes.

The Government’s investments in ensuring that students at every secondary school have access to computer science with more trained computing teachers and a new National Centre for Computing will play a crucial role in future proofing the country’s productivity. But it is the new national retraining scheme that I believe has the greatest potential to increase the UK’s productivity in the short term. Investment in digital skills, particularly for those who are already in work, will be central to unlocking national growth.

Opportunity for growth

Coupling investment in both digital infrastructure and in upskilling the existing and future labour market, there is no question that with this Budget Hammond has outlined a vision for a UK that is prepared to reap the reward of the fourth industrial revolution.

But whether the Government will deliver on these commitments and close the productivity gap, we’ll have to wait and see.